Murabaha and Ijara Defaults in the UAE: Enforcement, Asset Ownership, and Sharia-Structured Contract Risk

Default under an Islamic financing structure is not simply a conventional loan default with different terminology. In a Murabaha transaction, the financier purchases an asset and then sells it to the customer at a disclosed cost plus a fixed profit. In an Ijara transaction, the financier is the owner or lawful lessor of the asset and transfers its use to the customer for rent. Those different structures affect what is owed, who owns the asset, what risks remain with the financier, what security can be enforced and what remedies are available after default.

The UAE now has a particularly detailed legal framework for these transactions. Federal Decree-Law No. 50 of 2022 Promulgating the Commercial Transactions Law contains a dedicated regime for transactions of Islamic financial institutions, and the Central Bank has issued Regulation No. 1/2026 setting specific rules for Islamic commercial transactions, including Murabaha and Ijara. Those rules operate alongside the 2025 Central Bank law, Higher Shari'ah Authority standards, the financial-leasing regime, secured-transactions legislation and the general law of contracts and enforcement.

For lenders and customers, the practical question after default is therefore not simply: “How much is unpaid?” The more important questions are: What contract created the obligation? Who owns the underlying asset? Has the relevant benefit been delivered? What security exists? Which amounts may lawfully be claimed? And does the proposed enforcement route preserve the Sharia structure on which the transaction was based?

The current UAE framework for Islamic finance

Federal Decree-Law No. 6 of 2025 Regarding the Central Bank, Regulation of Financial Institutions and Activities, and Insurance Business provides the current institutional framework for Islamic financial institutions. It recognises the Higher Shari'ah Authority and gives it responsibility for the Sharia rules, controls, standards and general principles applicable to Sharia-compliant activities and businesses.

Article 74 of the 2025 law provides that Islamic financial institutions may conduct licensed financial activities in accordance with Islamic Sharia and that they are deemed compliant where they comply with the resolutions, regulations and standards issued by the Higher Shari'ah Authority. Each Islamic financial institution must also maintain an Internal Shari'ah Supervision Committee whose decisions are binding within the institution so far as they are consistent with the Higher Shari'ah Authority framework.

The Commercial Transactions Law then provides substantive legal treatment for Islamic commercial transactions. Article 472 identifies Islamic financing instruments and other transactions conducted by an Islamic financial institution as commercial transactions governed by Sharia rules. Article 473 prohibits an Islamic financial institution from arranging or charging interest or an additional benefit on an overdue debt, including late-payment interest.

Regulation No. 1/2026 changes the level of legal certainty

The Central Bank's Regulation No. 1/2026 concerning the rules and controls of commercial transactions of Islamic financial institutions and Takaful companies is particularly important for default analysis because it now states, in detailed statutory-regulatory form, how core Islamic financing structures operate.

The Regulation establishes a hierarchy for matters not specifically resolved by the Commercial Transactions Law: first the Regulation itself, then Sharia standards, rules and controls approved by the Higher Shari'ah Authority and issued by the Central Bank, and then the parties' agreement so long as it does not conflict with Sharia.

It also contains an important legal-certainty rule. A party may not argue that an Islamic commercial transaction is non-compliant with Sharia where it was concluded in accordance with the sources recognised in Article 3 of the Regulation.

That does not make drafting quality irrelevant. The Regulation also recognises that where only a part of a contract is defective because of a non-compliant condition, it may be possible to correct the contract by removing the cause of the defect.

Murabaha: a sale that creates a fixed payment obligation

Article 21 of Regulation No. 1/2026 defines Murabaha as a sale under which the seller sells movable or immovable property, or its equivalent, after the seller has acquired ownership and possession of it, for the original cost plus a fixed profit stated in the contract.

The Murabaha sale price must be determined and fixed when the contract is concluded. It cannot be left variable or linked to an index in a way that causes the sale price itself to change after contract formation.

Payment may be made by known instalments on agreed dates or by one deferred payment. Once the Murabaha sale is concluded, the customer's obligation is therefore a sale-price debt, not an interest-bearing loan balance.

The financier must own and possess the Murabaha asset before selling it

The ownership sequence is fundamental. The Islamic financial institution cannot simply lend money to the customer and rename the return “Murabaha profit”. The institution must first acquire the asset and take actual or constructive possession before selling it to the customer.

Regulation No. 1/2026 also addresses transactions initiated at the customer's request. If the customer has already entered into a binding purchase contract directly with the supplier before the institution acquires the asset, the Regulation prevents the institution from simply stepping into that transaction and reselling the same asset to the customer as a Murabaha. Existing contractual arrangements between the customer and supplier concerning the asset must be dealt with in accordance with the Regulation before the Murabaha purchase structure is implemented.

This ownership sequence matters in litigation because the financier's entitlement to Murabaha profit is connected to a genuine sale structure in which the institution takes the ownership and possession risk required by the transaction.

What happens to ownership after the Murabaha sale?

Once the institution sells the asset to the customer under Murabaha, the transaction should not be analysed as though the institution necessarily remains the beneficial owner merely because part of the sale price remains unpaid.

The new UAE Civil Transactions Law states generally that ownership of the subject matter of a sale transfers to the buyer when the sale is concluded unless legislation or the agreement provides otherwise. Islamic-finance rules add their own specialised requirements concerning ownership and possession before the institution's sale.

Accordingly, after a completed Murabaha sale the financier's primary claim on default will commonly be for the unpaid fixed sale price, supported where applicable by mortgages, pledges, guarantees or other valid security. Whether title has been retained, registered security exists or another proprietary remedy is available depends on the asset and the transaction documents.

A Murabaha financier should not assume that it can simply repossess the financed asset as “owner” after default. The ownership position after the sale and the existence of enforceable security must be checked separately.

Late payment cannot create additional Murabaha profit

This is one of the clearest distinctions between Islamic financing and conventional interest-bearing debt.

Article 474 of the Commercial Transactions Law provides that financial obligations arising from Islamic commercial transactions must be specific and definite and that a debt cannot be increased simply because its maturity is deferred. Regulation No. 1/2026 reinforces that rule.

The Regulation recognises two items that are not treated as prohibited additional profit on an overdue debt:

• amounts that the debtor has undertaken to donate to charitable purposes upon delay, provided the creditor does not benefit from them directly or indirectly; and
• actual direct expenses incurred by the creditor in collecting the debt, calculated in accordance with relevant Higher Shari'ah Authority decisions.

The institution therefore cannot treat default as an opportunity to increase the Murabaha debt by charging additional finance profit for the period of delay.

Acceleration and enforcement after Murabaha default

A Murabaha agreement will normally specify payment dates, events of default, representations, undertakings and the consequences of non-payment. Depending on the documentation, an event of default may allow the financier to demand amounts that have become due, exercise contractual acceleration rights, call guarantees or enforce security.

The enforceability of any acceleration provision should be considered together with the fixed-debt rules applicable to Islamic finance. Acceleration changes the timing of payment; it should not be drafted or operated as a mechanism for generating additional return solely because the customer defaulted.

Where the Murabaha is secured, Article 30 of Regulation No. 1/2026 expressly recognises that debts and obligations arising from Islamic financing may be secured by Sharia-acceptable security.

Security can be more important than the financed asset itself

The asset originally sold under Murabaha may be consumed, sold, transformed, depreciated or transferred during the financing period. A sophisticated financier therefore often relies on separate security rather than assuming the original Murabaha asset will remain available for recovery.

Depending on the transaction, security may include:

• a mortgage over real property;
• a security right over equipment or other movable assets;
• assignment or security over receivables;
• security over bank accounts;
• corporate or personal guarantees;
• share security; or
• other collateral permitted by the applicable law and Sharia framework.

Federal Law No. 4 of 2020 on Securing the Rights in Movables provides a federal framework for security rights over many categories of movable property, including receivables, bank accounts, equipment and inventory. Perfection, priority and enforcement should be analysed under that law where it applies.

Real-estate security remains dependent on the relevant property-registration and mortgage regime of the emirate in which the property is located.

Ijara is structurally different because the financier remains the lessor

Article 24 of Regulation No. 1/2026 defines Ijara as a contract under which the lessor transfers the benefit of a specified or described asset that it owns or has itself leased, for a known period and rent.

The distinction from Murabaha is critical. In Murabaha, the institution acquires the asset and then sells it. In Ijara, the institution remains the owner or lawful lessor during the lease and transfers only the use or benefit to the customer.

The Regulation provides that an Ijara of a specifically identified asset may not be concluded until the lessor owns or leases and takes possession of that asset. The lease begins only when the asset is delivered to the customer in a manner that enables the customer to use it.

Rent is linked to the ability to use the asset

Regulation No. 1/2026 states that rent does not become a debt owed by the lessee unless the lessee has received the corresponding benefit or has been enabled to receive it.

This can become important where the asset is not delivered, cannot lawfully be used, suffers a serious defect, or becomes unavailable through no fault of the customer. A lender should therefore distinguish missed rent on an operational asset from a claim for rent during a period in which the customer was not legally or practically able to obtain the contracted benefit.

Ownership risk stays with the Ijara lessor

One of the most significant features of the new regulatory framework is its express treatment of ownership risk.

Article 24 provides that basic maintenance costs, insurance against damage to the leased asset and ownership taxes are obligations of the Islamic financial institution in its capacity as lessor. The institution cannot initially contractually shift those ownership obligations to the lessee, and an agreement attempting to do so is invalid under the Regulation.

The Regulation also prevents the institution from excluding responsibility for defects that impair the intended benefit of the leased asset or for later defects that interfere with that benefit.

This allocation is reinforced by the CBUAE's 2026 Sharia Non-Compliance Risk rules. Those rules require Islamic financial institutions to manage the specific risks inherent in Sharia-compliant business and state expressly that an institution must not seek to circumvent risks it has contractually accepted, including asset and ownership risk.

What if the Ijara asset becomes defective?

If a defect or other event affecting the asset materially interferes with the contracted benefit and the lessee is not responsible, Regulation No. 1/2026 requires the institution to address the asset problem within a reasonable period.

If it does not, the lessee may have the option, under the Regulation, to terminate the lease or continue it on the terms specified by the applicable rule.

The default analysis therefore cannot focus only on the customer's payment history. If the customer stops paying because the asset was materially unusable, the financier must examine whether rent had accrued for that period and whether the lessor had fulfilled the ownership obligations imposed by the Ijara structure.

Destruction of the leased asset

The Regulation draws a distinction between Ijara of a specified asset and Ijara of an asset described by specification.

Where a specifically identified leased asset is destroyed, the Ijara terminates in accordance with the regulatory rule. Where the Ijara is of an asset described by specification, destruction of the particular asset allocated for use does not necessarily terminate the arrangement; the institution may instead be required to provide a replacement asset meeting the agreed specifications unless the parties then agree to terminate or replacement becomes impossible.

This is another example of why ownership and asset risk cannot simply be transferred to the customer through financing documentation.

Ijara ending with ownership

Many UAE Islamic financings use an Ijara muntahia bittamleek or similar lease-to-own structure. The customer expects to acquire the asset at the end of the lease or after a specified event.

Regulation No. 1/2026 makes the separation between lease and transfer particularly clear. The Islamic financial institution may issue a promise, in a document separate from the Ijara, to transfer the asset to the customer by sale or gift at the end of the lease or as agreed. The customer may also issue a separate purchase undertaking in specified circumstances.

But ownership does not transfer merely because the promise exists. The actual transfer must occur through a separate contract when the parties implement that promise.

This distinction is highly relevant after default. Before the transfer contract has been completed, the institution may still own the asset. After a valid transfer has taken place, the enforcement analysis changes fundamentally.

Ijara default and repossession

Where the lessee fails to pay accrued rent or commits another material default, the financier may have contractual rights to terminate the lease, enforce security and seek recovery of the asset. Those rights must be exercised through the applicable legal process.

A lender should not assume that the words “the bank owns the asset” automatically create an unrestricted right of private self-help. Possession may be held by the lessee, third parties may claim rights, the asset may be registered, and court or enforcement procedures may be required.

For transactions falling within the federal financial-leasing regime, Federal Decree-Law No. 32 of 2023 Concerning Financial Leasing is relevant. Regulation No. 1/2026 expressly provides that matters concerning Ijara not addressed in the Islamic-finance Regulation are subject to the Financial Leasing Law to the extent that its provisions do not conflict with the Islamic-finance rules and Higher Shari'ah Authority framework.

The Financial Leasing Law applies in specified cases where the leased asset or lessee's principal place of business is in the UAE, or UAE law governs the lease, while excluding financial free zones from its scope.

Registration and third-party effectiveness matter

Ownership between the contracting parties does not always answer priority against third parties.

The Financial Leasing Law provides that a leasing contract is binding between its parties but makes the effectiveness of rights against third parties subject to applicable perfection rules. For assets falling within the movable-security regime, the law specifically refers to Federal Law No. 4 of 2020 on Securing the Rights in Movables.

Accordingly, transaction counsel should consider whether the Ijara, security or ownership interest must be registered or otherwise perfected against:

• subsequent purchasers;
• other secured creditors;
• execution creditors;
• an insolvency trustee; or
• other persons claiming rights over the asset.

This becomes particularly important at default, when competing creditors may be seeking the same asset.

Financing assets and registration under the 2025 Central Bank law

Article 74 of Federal Decree-Law No. 6 of 2025 contains a specific provision intended to facilitate Sharia-compliant financing structures. Subject to its statutory qualifications, Islamic financial institutions receive exemptions from certain registration requirements, fees or similar costs for assets purchased, sold, leased, manufactured or otherwise dealt with as part of customer-financing activities or sukuk issuance.

That provision should not be read as eliminating every asset-registry, title or perfection issue. The same article recognises the interaction with legislation applicable in the relevant emirate, and other laws may determine enforceability against third parties, mortgage registration or transfer requirements.

The safer transaction approach is therefore to identify separately:

1. the Sharia ownership required for the financing structure;
2. legal title between the financing parties;
3. registration required by the asset's own legal regime; and
4. perfection required for security or third-party priority.

Default amounts: what can the financier actually claim?

The calculation depends on the structure.

Issue	Murabaha	Ijara
Core payment obligation	Fixed deferred sale price or instalments.	Rent for periods in which the contracted benefit was delivered or made available.
Ownership during financing	Generally transferred through the completed sale, subject to the transaction and asset-registration structure.	Remains with the lessor until a separate ownership transfer is implemented.
Additional return for late payment	Debt cannot be increased merely because payment is late.	Overdue rent cannot be converted into an interest-bearing debt merely because of delay.
Asset risk	Institution bears ownership/possession risk before resale; customer bears ownership consequences after the completed sale, subject to contract and law.	Ownership risk remains materially with the lessor during the lease.
Basic maintenance and asset insurance	Depends on the asset after sale and agreed lawful obligations.	Basic maintenance, asset insurance and ownership taxes are placed on the lessor by Regulation No. 1/2026.
Enforcement focus	Debt claim plus guarantees, mortgages, pledges or other security.	Accrued rent, termination rights, recovery of the leased asset and enforcement of other security.

Guarantees and collateral

Article 30 of Regulation No. 1/2026 confirms that financing debts and obligations may be backed by Sharia-acceptable security. In practice, Islamic financings may therefore use the same broad legal infrastructure for collateral as other secured transactions, provided the security and enforcement mechanics are compatible with the Sharia structure.

A creditor should check:

• whether the security agreement was validly executed;
• whether registration or perfection was completed;
• whether the collateral description is sufficient;
• whether another creditor has priority;
• whether guarantees remain effective after restructuring or amendment;
• whether the secured amount matches the enforceable Islamic-finance debt; and
• whether the enforcement route is affected by insolvency proceedings.

Insolvency can change the enforcement timetable

Corporate defaults may move into the UAE's Financial Restructuring and Bankruptcy Law under Federal Decree-Law No. 51 of 2023. That regime establishes collective restructuring and bankruptcy procedures and contains rules affecting secured and unsecured creditors, contracts and enforcement.

A secured Islamic financier should therefore not assume that contractual acceleration or ownership language alone determines what can happen after insolvency proceedings begin. The creditor's position will depend on whether the relevant asset belongs to the debtor, whether the financier is true owner or secured creditor, whether its security is perfected and what stays or court controls apply.

That distinction is especially important in Ijara. An asset genuinely owned by the financier should be analysed differently from collateral that belongs to the debtor but is pledged to the financier. The documentation and actual transaction steps must support the asserted ownership structure.

Sharia non-compliance risk is now an express regulatory risk

The CBUAE's 2026 Sharia Non-Compliance Risk provisions require Islamic financial institutions to maintain systems and controls covering the full life cycle of Sharia-compliant contracts, including formation, termination, fraud, misrepresentation and other matters affecting performance.

The rules require institutions to identify potential non-compliance, assess its severity and identify income that may not be recognised as eligible Islamic-finance profit. The Internal Shari'ah Supervision Committee has authority within the institution to determine whether a Sharia non-compliance risk event has materialised.

For default and enforcement teams, this means that recovery strategy should not be designed separately from Sharia governance. A remedy that effectively converts an asset-based structure into an interest-bearing debt or transfers a prohibited ownership risk to the customer may create regulatory and accounting consequences even if the commercial documents appear to provide leverage.

Documentation risk before default

Many enforcement problems originate at closing rather than at default. Common structural risks include:

• the institution never properly acquired the Murabaha asset before selling it;
• the customer already owned the asset before the supposed Murabaha purchase sequence;
• agency documents allow the customer to buy for itself rather than clearly for the institution;
• the Ijara begins before the asset is capable of delivering the contracted benefit;
• ownership obligations are shifted wholesale to the lessee;
• purchase and sale promises are drafted as though title transfers automatically;
• the security is not registered or perfected;
• the asset description differs across purchase, lease and security documents;
• late-payment provisions generate income for the financier rather than a permitted charitable obligation or actual collection cost; or
• amendments and restructurings change the economics without considering the Sharia character of the original transaction.

Restructuring a distressed Murabaha

A distressed Murabaha requires particular care because the outstanding sale-price debt cannot simply be extended in exchange for increasing the debt amount.

Commercial restructuring may still involve payment rescheduling, enforcement standstill arrangements, additional security, settlement, asset sales or a new independently valid financing transaction. But the parties should avoid a structure whose economic and legal effect is merely “more debt in return for more time” where the additional amount represents a return on the overdue debt.

The restructuring documents should also preserve the enforceability and priority of existing guarantees and security where intended.

Restructuring a distressed Ijara

Ijara can offer different restructuring possibilities because future rental periods relate to continuing use of an asset rather than only to a fixed historic sale debt. However, rent for each period must comply with the Ijara rules, and variable rent must be determinable before the relevant rental period begins in accordance with Regulation No. 1/2026.

The institution must also continue to respect its lessor obligations and ownership risk. Restructuring cannot be used to transfer to the customer costs that the mandatory Ijara rules require the lessor to bear.

A practical enforcement review

1. Identify the transaction. Confirm whether the exposure is Murabaha, Ijara, Ijara ending with ownership, or part of a wider multi-contract structure.
2. Reconstruct the asset steps. Verify purchase, ownership, possession, delivery and any agency arrangements.
3. Calculate only the legally recoverable obligation. Separate principal sale debt, accrued rent, actual collection costs, charitable late-payment undertakings and other amounts.
4. Identify ownership at the date of default. Do not assume the financier owns a Murabaha asset or that an Ijara purchase promise has already transferred title.
5. Review security. Check mortgages, movable-security filings, guarantees and priority.
6. Check asset-specific law. Real estate, vehicles, aircraft, vessels and other registered assets may require separate enforcement or transfer procedures.
7. Check Sharia governance. Confirm that the proposed remedy is consistent with HSA requirements and the institution's Internal Shari'ah Supervision Committee framework.
8. Check insolvency status. A restructuring or bankruptcy proceeding can affect individual enforcement.
9. Preserve evidence. Retain purchase contracts, invoices, title documents, possession evidence, agency records, delivery documents, Sharia approvals and security registrations.
10. Review restructuring before signing. Amendments should preserve both legal enforceability and the intended Sharia character of the financing.

Key takeaway

Murabaha and Ijara defaults in the UAE should not be treated as interchangeable finance defaults. Murabaha is structured around a genuine purchase and resale that creates a fixed sale-price debt. Ijara is structured around continuing asset ownership and the transfer of use for rent.

The UAE's 2026 Islamic-finance Regulation makes those distinctions legally significant. It prohibits increasing overdue Islamic-finance debt merely because payment is delayed, requires the institution to own and possess a Murabaha asset before resale, keeps core ownership obligations with the Ijara lessor and requires a separate transaction to transfer ownership under lease-to-own structures.

Enforcement therefore depends on getting the structure right from the beginning. The creditor must distinguish debt rights from ownership rights, ownership from security, accrued rent from future rent, and contractual leverage from remedies that remain compatible with the Sharia and regulatory framework.

HZ Legal can assist Islamic financial institutions, corporate borrowers, investors and asset owners with UAE Murabaha and Ijara documentation, default analysis, security enforcement, restructuring, asset-ownership disputes and Sharia-structured contract risk.

Official sources and verification notes

• UAE Legislation — Federal Decree-Law No. 50 of 2022 Promulgating the Commercial Transactions Law, including Islamic commercial transactions.
• CBUAE Rulebook — Regulation No. 1/2026 concerning Islamic commercial transactions, including Murabaha, Ijara and financing security.
• Central Bank of the UAE — Higher Shari'ah Authority and Islamic finance framework.
• CBUAE Rulebook — Federal Decree-Law No. 6 of 2025, Article 24, Higher Shari'ah Authority.
• CBUAE Rulebook — Federal Decree-Law No. 6 of 2025, Article 74, Scope of Activity of Islamic Financial Institutions.
• CBUAE Rulebook — 2026 Shari'ah Non-Compliance Risk requirements.
• UAE Legislation — Federal Decree-Law No. 32 of 2023 Concerning Financial Leasing.
• UAE Legislation — Federal Law No. 4 of 2020 on Securing the Rights in Movables.
• UAE Legislation — Federal Decree-Law No. 25 of 2025 Promulgating the Civil Transactions Law.
• UAE Legislation — Federal Decree-Law No. 51 of 2023 Promulgating the Financial and Bankruptcy Law.

This article provides general information only and does not constitute legal or Sharia advice. Islamic-finance enforcement depends on the transaction documents, asset type, ownership and possession history, Higher Shari'ah Authority requirements, security perfection, local registration rules, court procedures and any restructuring or bankruptcy process. Specific legal and Sharia review should be obtained before enforcement or restructuring.